June 11, 2008 / 9:31 PM / 11 years ago

Virgin Atlantic chief sees more airline failures

NEW YORK (Reuters) - More U.S. airlines need to go out of business and the price of tickets must rise much further if the air travel industry is to survive record oil prices, the chief executive of Virgin Atlantic Airways VA.UL said on Wednesday.

Rules prohibiting foreign ownership of airlines must also be swept aside if the U.S. industry is to climb out of its slump, according to the chief of the British airline, which has been expanding since its creation by billionaire Richard Branson in 1984.

“Carriers are going to go out of business and need to go out of business,” said Virgin’s Steve Ridgway in an interview in New York. “We can’t just keep up this merry-go-round of propping them up,” referring to repeated bankruptcies among U.S. carriers.

The failure of one or more big carriers in the United States would reduce competition and allow others to raise ticket prices, most analysts agree. But flexible U.S. bankruptcy protection laws have so far allowed airlines to get over financial hardships while still operating, where in other countries they might have stopped flights altogether.

Nine small airlines have gone into bankruptcy or stopped operating in the last six months, crushed by the doubling of fuel prices in the last year, but so far very little capacity has actually been taken out of the market.

Four of the major U.S. carriers have been through bankruptcy in the past five years, but all have survived and some have even added flights, which increased competition and resulted in lower ticket prices.

“Ultimately the industry is going to have to re-price,” said Ridgway, meaning that ticket prices will have to rise. “That will have an effect on demand and that will ultimately have an effect on capacity balance.”

CAPACITY CUTS

In the last three months, Continental Airlines Inc (CAL.N), AMR Corp’s AMR.N American Airlines, UAL Corp’s UAUA.O United Airlines and Delta Air Lines Inc (DAL.N) have all announced double-digit cuts in domestic capacity for this winter — meaning that the number of flights will be reduced — as they grapple with soaring fuel prices.

British Airways Plc BAY.L, Virgin’s main rival, has said that capacity cuts are “inevitable,”, but Ridgway said the airline had not made any decisions yet.

“The acid test will come in the winter and the autumn,” he said. “We aren’t going to be immune to this.”

No international flights are being cut by the U.S. airlines, Ridgway said, stressing that international travel is still relatively strong, even as the U.S. economy weakens.

“Some of the marginal U.S.-Europe routes may well get pulled, but the London market will remain very dominant,” he said.

Privately held Virgin, which operates about 30 flights a day from the UK to the United States, Caribbean, Middle East, Asia, Australia and South Africa, is only a fraction of the size of the world’s major carriers, but it has carved a powerful niche in the lucrative transatlantic market and has a number of coveted slots at London’s Heathrow airport.

About 60 percent of Virgin’s passengers live in Britain, which means the weak dollar has been good for its business, especially in its strong leisure market.

Last year Virgin set up a domestic U.S. airline, Virgin America, but cannot own any more than 25 percent of it due to laws unique to the U.S. airline industry. If the industry is going to develop, those rules must be cast aside, said Ridgway.

“It’s crazy that the industry which made the global economy possible is still sitting there with all these shackles and all this inefficiency,” he said. “Can you look at their system and say it’s worked brilliantly?”

BOEING DELAYS

Boeing’s (BA.N) delayed 787 Dreamliner is “frustrating” but not disastrous for Virgin, said Ridgway, as the airline is not in a hurry to replace its Airbus A340s.

The British carrier has ordered 15 of the larger 787-9 models, worth $2.8 billon overall at list prices, and has options and purchase rights on another 28.

First delivery of the carbon-composite, fuel-efficient plane is now slated about 15 months behind the original schedule after a series of production setbacks. Most airlines will be getting their planes 18 months to two years late, Ridgway said, as Boeing struggles to get up to its promised production rates.

“They set themselves a very ambitious hurdle, that’s where they tripped up,” said Ridgway, who is now expecting Virgin’s first 787 toward the end of 2012, as opposed to the original target of April 2011, which he described as “quite a long time to wait”.

Virgin, like other 787 customers, is in talks with Boeing over compensation, but nothing has been determined yet.

“When you build a sales patter around the fact you can build an aircraft every three days, that creates the book doesn’t it?” said Ridgway. “If that doesn’t work, that’s a big problem for them. How do you get the supply chain up to that?”

Reporting by Bill Rigby; editing by Carol Bishopric

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